Cuba’s Cigar Exporting Future

Habanos S.A., the distribution and marketing arm of Cuba’s state-owned cigar industry, said recently that it expects to immediately gain 25-30% of the U.S. premium cigar market if the U.S. lifts its trade embargo – and up to 70% within a few years.

History

Cuba’s once dominant position in the world’s cigar market (rolled tobacco) diminished in 1962 when the U.S. embargo restricted Cuban imports. Excluded from the single largest cigar market in the world, regional players stepped in to fill the gap left by Cuba’s exclusion. Cuba’s reputation remained in tack (with the exception of a few off years), but its dominance in terms of volume has never recovered.

In February 1992, Wine Spectator magazine published an in-depth cover story, “The Allure of Cuban Cigars.” The strong positive reaction prompted the publisher to launch a cigar-themed magazine, Cigar Aficionado, later in the same year.

The backdrop of the magazine’s launch was a boom in U.S. cigar consumption. Beginning in 1992, imports and sales of premium cigars began to rise dramatically and manufacturers struggled to keep up with demand, leading to industry-wide shortages of raw materials and finished products.

Victor Taveras, director of the National Tobacco Institute (Intabaco), recently announced that the Dominican Republic is the world leader in hand-rolled cigar exports. Cigar exports from the Dominican Republic topped $600 million dollars in 2013. In fact, eleven of the Cigar Aficionado Top 25 Cigars of 2013 were made in the Dominican Republic.

In October 2002, Altadis S.A. (now Imperial Tobacco) bought a 50% stake in Habanos S.A.. Some reports suggest the price was about $477 million for the 50% stake.

Habanos S.A. 2014 sales are estimated at $439 million.

Preparing for Re-entry to the U.S. Market

Habanos S.A. has promised to preserve the quality of its Cohibas, Montecristos and Romeo y Julietas should it need to ramp up production to meet any new U.S. demand, which it estimated at 70 to 90 million units per year right away if the U.S. were to remove the embargo.

Isolate North America in the above graphic to display Cuba’s relative contribution to the rolled tobacco export value in the region.

“Some might consider that figure a little conservative, but I can tell you that with that figure, 25%, we would be the market leaders,” Jorge Luis Fernandez Maique, commercial vice president, told reporters at the start of Cuba’s annual cigar festival in 2014.

Prospects of the U.S. removing its 55-year-old ban on trade with Cuba improved after the U.S. and Cuba announced in 2014 their intention to restore diplomatic relations. Since then, former President Obama has lifted Cuba-specific import restrictions for “personal consumption.” This means Americans can return from Cuba with up $800 of Cuban cigars (or any combination of Cuban-origin products). Yet the embargo still restricts the sale of Cuban products in the U.S.

U.S. cigar sales have waned since the 1990’s cigar boom, but demand for premium cigars remains firm.

With the U.S. cigar market totaling about $8 billion annually, representing about 34% of the world market, the market opportunity for Cuban cigars in the U.S. translates into orders of magnitude increases in Habanos S.A. revenues.

Fernandez Maique and Javier Terres, the vice president for development, declined to estimate the sales impact in dollar terms because it might betray the company’s U.S. pricing strategy.

Cuba’s Cigar Exporting Future was last modified: February 5th, 2017 by Simons Chase